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GFDR 2015: Long-Term Finance

Global Financial Development Report 2015

Long-Term Finance

Concept Note Summary

The World Bank Group’s 2015 Global Financial Development Report will be the third report in the series. Following up on the 2013 report on “Rethinking the Role of the State in Finance” and the 2014 report on “Financial Inclusion”, the 2015 report’s theme will be “Long-Term Finance”.

Long-term finance has attracted heightened interest from policymakers, development institutions, donors, and other stakeholders. This reflects concerns about restricted availability of long-term finance and its effect on development, poverty reduction, and shared prosperity. The issue has become even more prominent recently, as the effects of the global financial crisis have constrained the supply of long-term funding even more than before. Concerns about the effects of the shortage of long-term finance have been voiced by the G20 and many others.

Underlying these concerns is the roll-over risk. Many financial systems, especially in the developing world, are imperfect, resulting in a scarcity of long-term finance. On the borrowing side, limiting the cost of long-term debt is central to housing, infrastructure, and long-term corporate finance. On the savings side, investing long term is central to resolving the financial challenges of retirement, education needs, health shocks, and premature death. Thus, a financial system’s capacity to spread long risk effectively is crucial to a viable private pension, education, and health system. But the two sides of the market often have a hard time meeting, reflecting the size and complexity of the risks involved. The price at which lenders are willing to assume the long risk thus often exceeds the price that borrowers are willing to pay.

The aim of the 2015 Global Financial Development Report, and of the related work program, is to contribute to the policy debate on long-term finance, and provide thought leadership, building on findings from recent and ongoing research as well as lessons from operational work. It will rigorously examine existing and new evidence on the effects of long-term finance for poverty reduction and shared prosperity. It will identify policy steps to address any gaps.

The work on the report is supported by the World Bank Group and led by the World Bank’s Development Economics Vice-Presidency. It builds on inputs from financial sector professionals and researchers within the Group and outside. The report will benefit from new worldwide datasets and information on financial development. The report will be informed by recent research and policy work, such as the report prepared by World Bank staff and others for the February 2013 G20 Finance Ministers and Central Bank Governors' meeting in Russia.

The 2015 Global Financial Development Report, will seek to avoid simplistic views, and will take a nuanced approach to financial sector policy, based on a synthesis of new evidence. It will provide a broad and balanced review of the evidence and distill pragmatic lessons on long-term finance and related policies. This suggests some skepticism with regard to policy-induced changes in the term structure of finance without changes in the overall institutional environment. Indeed, attempts to promote long-term credit in developing economies have often been costly.

The report will include four chapters, addressing the following questions. First, what are the links between long-term finance and economic performance? Second, what is the evidence on the use of long-term finance by firms and households? Third, what is the evidence on the institutions and markets ensuring the provision of long-term finance? And fourth, what are policies, conditions and institutions that foster the availability of long-term finance domestically and internationally?

Chapter 1 will start by defining long-term finance, and will discuss the channels through which long-term finance contributes to growth, stability and welfare. It will analyze how the availability of long-term finance contributes to economic development both from the point of view of the suppliers and from the point of view of the users of long-term finance such as firms, households and the government. It will next discuss the empirical challenges of distinguishing the use and availability of long-term finance. Key stylized facts across countries and over time on the use of long-term finance by firms and households, and on the domestic and international financial institutions and markets that provide and intermediate long-term finance will be presented, including banks, equity and bond markets, institutional investors and other non-bank financial institutions.

Chapter 2 will focus on the analysis of the use of long-term finance by corporations and households. It will distill the findings of recent cross-country and country specific research on the determinants of firms’ capital structure, noting that country characteristics matter as much as firms’ characteristics in explaining debt maturities. It will examine and presents findings of research exploring the relationship between firm performance and their use of long-term finance. It will discuss empirical analysis on the use of long-term finance by households (in particular housing finance) and outcomes such as consumption, income, and children’s education.

Chapter 3 will turn to the analysis of the financial institutions and markets that ensure the availability of long-term finance. It will look both at domestic and international markets for long-term finance. The chapter will analyze the maturity of bank assets, and the empirical evidence of the impact of the crisis on the availability of long-term bank credit, including in the syndicated loan market. It will draw lessons from recent empirical evidence on the capital raising activities by corporations. It will note that only a subset of firms, mainly large firms, have access to the services provided by long-term domestic capital markets, and an even smaller fraction of large firms are active in international capital markets. It will analyze the global investment strategies of mutual funds, their potential impact on the maturity structure of domestic securities, and will also analyze the investment and portfolio choices of domestic pension funds, insurance companies and the determinants of private equity investments.

Chapter 4 will discuss key policy issues. It will discuss the country factors that enable the development of long-term finance. It will then turn to specific institutions and markets, focusing on policies specifically important for each institution or market. The chapter will cover banks, institutional investors, bond and equity markets, sovereign wealth funds, private equity, and the role multilateral development institutions. Themes will include the macroeconomic, legal, institutional and regulatory environments, market development issues, the role of state-owned specialized banks, competition policies, issues related to infrastructure finance, direct interventions and public-private partnerships.

Accompanying the report will be an updated version of the associated website,, with interactive features and access to the underlying data and analysis. The website will include an expanded version of the Global Financial Development Database, a dataset of over 70 financial system characteristics for 203 economies since 1960.

The 2015 Global Financial Development Report will be a part of a broader initiative to enhance the global financial system. It should prove useful to a wide range of stakeholders, including governments, international financial institutions, nongovernmental organizations, think-tanks, academics, private sector participants, donors, and the wider development community.

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